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Risk Appetites Improving; Watching Financials, Copper, US Dollar

Risk Appetites Improving; Watching Financials, Copper, US Dollar

Posted October 12, 2021 at 11:47 am
Vermilion Research

Market dynamics remain largely healthy, and new developments continue to point to improving risk appetites. Still, Energy (XOP, RYE) is the only cyclical value Sector that has been able to decisively break to new price highs, while others remain in congestion. Therefore, our outlook remains neutral yet constructive overall, and we see pullbacks as buying opportunities.

  • Risk Appetites Improving. We continue to see signs of improving risk appetites, including (1) new RS lows/underperformance from defensives such as Staples (XLP), Utilities (XLU), pharma (PJP, PPH), and telecom (IYZ), (2) small-caps beginning to outperform relative to large-caps, (3) China (MCHI, KWEB) displays a bullish RS reversal as price attempts to bottom, (4) high yield spreads are narrowing, (5) the 10-year Treasury yield is moving higher, (6) WTI crude oil is breaking above major long-term resistance at $77,  (7) the Energy Sector (RYE and XOP)is breaking above major resistance at $47.50 and $100, respectively, (8) banks (KRE, KBE) display bullish price and RS reversals, and (9) Materials (XLB), Industrials (XLI), and Transportation (IYT) display bullish short-term RS reversals. This is risk-on behavior and is not what we would expect to see if the major averages were headed for a significant correction.
  • Watching Financials, Copper, and the US Dollar. Financials (XLF) are on the cusp of a breakout above $39, while copper is on the cusp of a breakout above $4.38; breakouts above their respective resistance levels would be major bullish developments for the broad market, while a failure to break out would signal more consolidation. The US dollar (DXY) is testing longer-term resistance at $94.70-95; as long as the DXY is below $95, it is likely to be a risk-on signal for stocks… see charts below.
  • S&P 500. The S&P 500 has struggled since breaking below its 50-day MA, a level that is now resistance. The S&P 500 is going through a normal pullback and forming a short-term falling wedge pattern. We expect consolidation to continue on the S&P 500, and are watching for support at 4300-4305 followed by 4257, 4233, and 4164. Alternatively, a break above 4430 would signal the pullback is over.


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